10 Surprisingly Common Estate Planning Mistakes

Summary

Leaving assets directly to a minor without dealing with guardianship issues

Not planning for the death of a beneficiary

Ownership mistakes and imbalances

Not having a residuary clause

Not planning for the unexpected

Not dealing with your own mortality

[Edited Transcript]

1. Beneficiary blunders

Janice: It’s not naming a contingency beneficiary on your retirement account and insurance policies. So what they’re saying here is that you might have a beneficiary, but what if something happens? Do you have a backup? Do you have a contingent? It’s just important to have a plan, a backup plan in place.

Anthony: So I’m going to disagree with this one. I’m not a big fan of doing your estate planning through your beneficiary forms. And the reason for that is people forget, and this is a really bad way of organizing what you have where. So, I mean, I think most folks have so many accounts at this point in their lives that it’s just hard to keep track, and it’s not something that you can log on to your account and look at very readily. You have to call the 800 number in many cases.

Anthony: So just anyway, based on my experience, I’ve seen folks who try to manage their estate plan through beneficiary forms invariably end up missing one and throwing off their whole scheme, meaning like one account was left to an old beneficiary. But, again, that’s just my experience.

Janice: What would you suggest they do instead?

Anthony: You can have primaries, like spouse or adult kids, but anything beyond that where you start doing if, ands, or buts, just throw it into your will. Get it into your estate or revocable trust, I mean, if you want to avoid probate. Do it through your estate planning documents.

Janice: Very good plan.

2. Selling property for $1

Anthony: I don’t know what this is referring to. This might be a fairly old practice where there are a few instances today, but he’s basically saying giving away your property for nominal value, if I’m reading this correctly. People don’t do that anymore. That will definitely get picked up on gift and estate tax audit. But I guess he’s saying folks still make this mistake and think they can pull one over on the IRS. Well, you can’t.

Janice: I know. There’s so many forms that go along with any type of property transfers. I don’t know how that would fly anywhere at this point.

Anthony: Yeah, I mean, when I first started my career in the ’90s, maybe this would have gone through, but in this day and age, it won’t happen.

Janice: No, they’ll be all over you if you try to sell your property for a dollar.

3. Naming specific investments in your will

Janice: Naming specific investments in your will. So this was an interesting one where they said the problem was that they left the shares of a particular stock at one time worth $10,000 to a grandchild, and then 30 years later, that stock was worth a significant amount, and they didn’t own the stock anymore. So they had to go back. It was an interesting story. I had never heard of anything like that where they had to go back and make up that value. I have heard of leaving specific items that then had to be appraised, which could lead to different tax ramifications, but I haven’t heard of this type of situation. Have you?

Anthony: “I leave 10 bitcoin to Nephew Charlie,” and at today’s value … this is not correct. I’m not quoting a bitcoin price, but at the time it was a dollar per bitcoin, and then at the time of death, you had sold your bitcoin but bitcoin on the market is worth tens of thousands of dollars per. It just causes so many problems. Do not, unless you’re talking about a heirloom, like a watch or a painting or … I mean I even hate to say this, maybe a car, but cars only last a couple years. Don’t do specific gifts. Give cash or percentages.

Janice: Percentages, definitely.

4. Not thinking through a well-intended gift

Janice: So in this one, they give the example of a family had three children and they said that they had to live within a certain area. And they all had to live there, and they all had to own a house on that side of town to be able to receive different beneficiary through the will, but the problem was, one moved all the way to San Diego. So I think the mom went really well to say, “I’d like you all to live here, and that in order to sell my house, you have to be close,” but not thinking about life changes and we end up all over the world. So they had to go through a really lengthy process to sell that house because part of the will said they all had to live right there.

Anthony: So, I mean, to me, it seems like these are so far all falling under the same category of keep it simple and keep it in your centralized estate planning documents. Any other twists and turns, risks, just problems, essentially.

Janice: And prolonging the whole process and costing more money. They had to probably spend … it says here they lost over $500,000 in legal fees trying to take out-

Anthony: Whoa.

Janice: Yeah, that’s significant. And in some places, that’s more than the estate is actually worth.

5. Leaving assets directly to a minor without dealing with guardianship issues

Anthony: Okay, a lot of people don’t know this. Kids don’t own money. If you have kids, they live at your sufferance. You own everything that they own. They’re not their toys. They’re your toys.

Janice: Well, I don’t know if they would agree with that statement, but in reality, it’s true.

Anthony: Yeah. I mean, try opening an account for your kid. It’s not going to be a real account that’s in their name because they can’t own anything. It’ll either be an account that’s technically in your name with a memo that has your kid’s name on it or it’ll be something special, like an UGMA or a UTMA account. I don’t want to get into that on this talk, but those are special types of accounts that parents and kids can kind of own jointly. It’s not really jointly, but anyway. So anyway, the point-

Janice: Just proving that they can’t own it on their own.

Anthony: Exactly. Kids don’t own anything. So if you leave a portion or a beneficiary or anything to a minor, you can’t leave it to them. So the parent or the guardian will have to go to court and get a special appointment to have permission to manage those funds for them. The way you can get around that is by, again, appointing a guardian in your will or setting up a trust in your will.

Janice: It’s also a great idea to have, like you said, specific information in there. You don’t want to give a 18-year-old kid a $500,000 inheritance at once. That might be a problem.

Anthony: Oh. Please don’t. I have so many stories. Yeah.

Janice: Right. Money management. And there has to be somebody that oversees the whole process when they are younger.

6. Not planning for the death of a beneficiary

Janice: So if you have three, four children, and it is unfortunately life where one may pass before you do, not specifying what happens to their share could lead to problems down the road. So there’s different words, per capita, per stirpes. Are you going to leave it to their childrens and then their children, or are you going to redistribute it back to the other children? So there is a lot to think about there in how you want to set that up.

Anthony: I think it’s more of a you need to understand what would happen if you don’t deal with it because there are default laws in place that’ll tell you what happens, and you just need to know, “Do I agree with that or do I need to do something different? Do I need add something in my will or trust to make that different?”

7. Ownership mistakes and imbalances

Anthony: I think this actually ties back into what I was saying before about if you try to do estate planning with your beneficiary designation, then you lose track of them, things get thrown out of whack. So one example would be if you’re trying to give your three kids equal shares and, whatever, you think or you recall that you have three brokerage accounts and they’re roughly equal, so you name one kid a beneficiary on each and then you pass away. But oops. You forgot about that life insurance policy you had that gave all to one of the other kids. There’s a huge imbalance now. And this is what I mean by not doing it through beneficiary forms, but yes, these kinds of things can lead to big swings in what you meant to do.

Janice: I think that’s the moral of this whole story is what do you actually mean to do when you’re writing your document, and how do you want it to end up.

8. Not having a residuary clause

Janice: That deals with everything you didn’t say, what happens to it when … there’s an example here. They found out there was a 4′ by 25′ strip of land, but it wasn’t in the will. So the residuary clause is saying, “Anything else left over is going to be taken care of this way.”

Anthony: I would rephrase this one. It says not having a residuary clause. I would rephrase this to doing your will with an attorney.

Janice: Absolutely. There is no question about that.

Anthony: No, because even the most … I don’t know how to put this, but every lawyer would know to put this into your will. The only reason you would have a will without a residuary clause is if you try to do it on your own or do it through a software that was not well-written. So to me, the point of this is avoid stupid mistakes that would be easily avoided with a professional.

Janice: Always go with a professional. Always go with a professional because, like you said before, you have seen all of these different examples where they give you these stories. You’ve seen them.

Anthony: Yep. So yeah, because my practice is primarily on the, I guess, post-death side, I do mostly probate and executorship. Some people do the plans. I see what happens when those plans have to come into play, and did they actually work and what went wrong? I see the backend of things, and I’ve seen too much. Let’s put it that way.

Janice: Which is maybe not great, but it’s really good for someone that is setting up this plan. You can say, “Oh, no. That’s not going to work,” or, “Yeah [crosstalk 00:10:36]

Anthony: Yeah, that’s probably not … I mean, not even in terms of a legal sense, but just based on the odds. People often make this mistake. Why don’t you just try to avoid that?

9. Not planning for the unexpected

Janice: Well, you won’t know if there’s a sudden decline in someone’s health that’s going to be your executor. Can they handle that much money? That’s why I think when you sit down with somebody to plan your estate, you talk about that, that what ifs, the children. Have everything set up beforehand and have an alternate if that’s what you think that will help to plan for this unexpected. But I really think it was a little confusing, but it goes back to the sit down with a professional, talk about your circumstances and what … They may be able to help you. Like you said, you’ve seen stuff and you can set up for it.

Anthony: Just in terms of my personal philosophy, I don’t advise anyone to spend their whole life worrying about every possibility. I mean, that’s no way to live. I’ve had clients not only have backup executors and backup backup executors and backup backup … I mean, I’ve had clients ask, “What if the entire family is at a reunion and we all get wiped out?” I’m like, “Dude, if that happens, you have more to worry about than what happened in your will. I mean, the unlikelihood of that happening is … ” come on. Have one or two layers of what ifs and then just relax.

Janice: Just let it go.

Anthony: Yeah, if one or two of those trigger, then, yeah, come back to me or whoever your attorney is and sort it out from there. You don’t need to spend so much time thinking of every possible outcome.

Janice: No, and if you sit down with someone originally and you have a solid plan, that should give you some relief.

10. Not dealing with your own mortality

Anthony: I believe this is basically saying, “Hey, just get some of this stuff done.” Ignoring it and sticking your head in the sand is just not a solution for anything, yeah?

Janice: I completely agree. It’s not a great topic to talk about but it’s necessary. We have to do it. You want to plan. Just do it, get it out, over with, pull the Band-Aid, and then you’re done.

Anthony: Yeah, and if you find a good attorney, it’ll be a phone call, a meeting, a signing, and then you’re good for, hopefully, four to eight years. I like to tell folks to consider your estate planning like an Olympics or a presidential election. Four years, take a look. You might be able to punt to the next cycle for eight years and not have to do anything.

Janice: That’s a good plan. I didn’t think of that, the four to eight-year Olympic cycle for your will.